Competitive Analysis Romania

Hunor Kovcs CEU Business School EMBA 07

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Executive Summary
What is the explanation for having hundreds and thousands of indexes and international measurement strategies that focuses on countries and nations, providing rankings and reports? The answer is in the human nature and in the risk awareness that drives every responsible person in its decision making process. This essay is a competitive analysis of Romania and aims to provide an overview of the countrys main economical indicators a short political status quo and some recommendations on competitiveness. Romania currently is classified as a country in transition from investment driven economy to innovation driven. On the GCI ranking published yearly by World Economic Forum is ranked 64, mostly due to EU admission euphoria and hopes, though real improvements toward innovation are visible in the countries numbers. Romanias main deficit in competitiveness is caused by a very poor basic infrastructure compared to competing countries like Hungary, Bulgaria or Poland. A considerable investment in infrastructure, attracting foreign capital, would quickly and considerably improve competitiveness transforming it from a geographically well positioned country to a real hub between Middle East, Russia and Western Europe. Continuing investing in research and education, Romania could develop into the main nearshore partner of EU. This would be possible by making use of the special relation with Moldavia, a country that has a mainly Romanian population.

General Evaluation of Competitiveness

Before jumping into actual evaluation, numbers and analysis, lets see how global strategists define competitiveness. In looking at a countrys competitiveness [1] Porter defined the competitive advantage of a nation as its capacity to attract firms, companies and enterprises to use its platform to conduct business. Porter introduced the concept of the competitiveness diamond with four facets: Resources (natural, human, research, information, infrastructure) Innovation friendly business environment Demanding local market; and Presence of supporting industries

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Based on the diamond concept the economies of the world can be grouped in three categories: Stage 1 - Resource driven Stage 2 - Investment driven; and Stage 3 - Innovation driven

According to the most recent GCR report in 2010 Romania is at the transition from investment driven country to innovation as the most of its neighboring competitors. In a more recent definition the competitiveness is the set of institutions, policies, and factors that determine the level of productivity of a country [2]. The Global Competitiveness Index provides an overview of competitiveness based on 12 pillars. For 2009-2010 Romania is ranked on position 64 with a score of 4.11 Annex A In comparison the previous year Romania was on the 68th position with a score of 4.10. In order to analyze the main factors and drivers of competitiveness in Romania lets look at the table with the scores per pillars:

Pillar Basic requirements 1st pillar: Institutions 2nd pillar: Infrastructure 3rd pillar: Macroeconomic stability 4th pillar: Health and primary education Efficiency enhancers 5th pillar: Higher education and training 6th pillar: Goods market efficiency 7th pillar: Labor market efficiency 8th pillar: Financial market sophistication 9th pillar: Technological readiness 10th pillar: Market size Innovation and sophistication factors 11th pillar: Business sophistication 12th pillar: Innovation
Figure 1 - GCI rankings per pillars

Rank 86 84 110 75 63 49 52 61 79 56 58 41 75 83 70

The lowest rank received on the infrastructure (110th from 133 countries!) has a serious impact on both economy and day-by-day life of the country. The transport infrastructure does not meet the current needs of a market economy and lags behind Western Europe [3]. Due to its location (access to Danube, Black Sea and a large network of domestic and international airports) Romania is a

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

major crossroad for international economic exchange but the lack of advanced routes and highways turns it into a considerable weakness Annex D. The three lowest rankings are all received in the Basic requirements category. The inherited governmental institutions from the previous regime are still slow and ineffective. The institutional environment is defined by the legal and political framework and how the government interacts with the private sector. Romania failed to establish a stable political environment with a converged aspiration free of individual or group interests. Romania is ranked very high on a global list of corrupt countries. Today there is therefore a risk that Romanian government will fail a vote of no confidence and fail to serve its full term, until the parliamentary election that is due in late 2012 [4]. Another aspect is that as in all ex-communist countries these institutions are considered a place of work for life and the employees arent properly motivated to work and perform as they would in the private sector. The institutional instability heavily affects macroeconomic stability, which therefore received another low ranking. When looking into the strength of Romanian economy we have to understand that its location is something of a great benefit and should be used to increase competitiveness but we will cover this later in the recommendations section. Romania is 7th largest EU country and it is second biggest from the eastern bloc. Its market size therefore is a great opportunity and domestic consumption could be a differentiator in regional competition. With a population over 21 million, most of them living in urban areas; with 5 cities close to half million inhabitants and a Bucharest with over 2 million citizens Romania has a huge market potential for stimulating domestic consumption and generating GDP growth. Ranking innovation and sophistication factors in the upper half shows the trend of transitioning from investment driven economy to an innovation driven one. By 2008 Romania has achieved [5]
Pillar 2nd pillar: Infrastructure Basic requirements 1st pillar: Institutions 11th pillar: Business sophistication 7th pillar: Labor market efficiency 3rd pillar: Macroeconomic stability Innovation and sophistication factors 12th pillar: Innovation 4th pillar: Health and primary education 6th pillar: Goods market efficiency 9th pillar: Technological readiness 8th pillar: Financial market sophistication 5th pillar: Higher education and training Efficiency enhancers 10th pillar: Market size Rank 110 86 84 83 79 75 75 70 63 61 58 56 52 49 41

Figure 2 - GCI rankings - lowest to higher

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

a total GDP of 200 billion current USD (up from 169 in 2007 and 122 in 2006) a GDP per capita of 9299.74 current USD (up from 7856.48 in 2007 and 5681.09 in 2006) a GDP per person employed of 11644 (constant 1990 PPP) USD (up from 10902 in 2007 and 10306 in 2006) a GDP growth of 9.43 annual % (up from 6% in 2007 and 7.9% in 2006) 995 patent applications (residents) (up from 827 in 2007 and 814 in 2006)

The import and export of goods and services is defined by the following figures [5] Good and services o o Import 40% of GDP Export 29.91% of GDP

ICT goods o o Import 7.52% of total goods import Export 5.34% of total good export

ICT services export 15.81% of total goods and services export

These indicators places Romania in the upper middle income category states, as classified by the World Bank.

Historical Perspective
In 2010 Romania shows an improvement in the overall ranking compared to the previous year. In GCR 2008/2009 Romanias economy is classified as an investment driven one Annex B , while in the GCR 2009/2010 report it is labeled being in transition phase from investment driven to innovation driven economy Annex C . According to analysts Romanias improvement in the overall GCI rank is linked to the perceived benefits brought about by EU accession, a trend also witnessed in Bulgaria (moved up four places), the other new EU member since 2007. Is this really the case and Romanias progress in ranking is only due to EU accession? Lets see the figures:

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Indicator GCI rank GCI score GDP growth (annual %) GDP per capita (current US$) GDP per person employed (constant 1990 PPP $) Gross savings (% of GDP) Imports of goods and services (% of GDP) Research and development expenditure (% of GDP) Patent applications, residents Exports of goods and services (% of GDP)

2004 2005 2006 2007 2008 63.00 67.00 68.00 74.00 68.00 3.86 3.67 4.02 3.97 4.10 8.40 4.17 7.90 6.00 9.43 3481.20 4572.05 5681.09 7856.48 9299.74 9096.00 9620.00 10306.00 10902.00 11644.00 16.02 15.84 17.35 20.69 24.87 45.03 43.28 38.63 42.85 40.36 0.39 0.41 0.46 0.54 937 916 814 827 995 35.93 32.92 29.55 30.72 29.91

Figure 3 - Selected Economy Indicators

Figure 3 does not show extraordinary numbers for Romanian economy. It reflects however the expectation towards an economy called sometimes the tiger of the Balkans and it shows greater GDP growth than the EU average. Figure 4 gives an explanation why Romania is now classified as an economy transitioning to innovation driven [6].
Country/Region 2008 2007 2006 2005 2004 2003 2002 2001 European Union (27 countries) 1.52 1.55 1.53 1.56 1.56 1.58 1.6 1.58 Bulgaria 0.85 0.66 0.82 0.79 0.84 0.86 0.91 0.82 Greece : 0.67 0.76 0.74 0.66 0.59 0.58 0.63 Hungary 0.87 0.78 0.7 0.83 : : : : Poland 0.7 0.75 0.72 0.68 0.73 : : 0.88 Romania 1.06 1.03 0.94 0.65 0.51 0.48 0.4 0.44 Slovakia 0.79 0.62 0.73 0.74 0.8 0.74 0.7 0.76
Figure 4 - GBAORD numbers

The GBAORD stands for government budget appropriations or outlays on R&D and are measuring government support to R&D activities, or, in other words, how much priority Governments place on the public funding of R&D. Starting from 2002 Romania shows a constant increase in the budget allocated for R&D and starting from 2006 it allocates more than competitors (Bulgaria, Hungary or Slovakia).

Comparative Evaluation of Competitiveness

In this section we will cover the comparative aspect of Romanian economical and competitive indicators. In this comparison we will focus on Bulgaria, Hungary and Poland.

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Starting from 2001, with two exceptions, Romania showed greater GDP annual growth than Hungary, Poland or Bulgaria Annex E. This was the reason why some analysts used to call Romania the tiger of Balkans. Another interesting aspect to analyze is the relation of GDP per capita (which is calculated using gross domestic product divided by midyear population) and GDP per person employed Annex F . This relation provides a greater visibility of production distribution in a specific country. In Romania this ratio falls from 73.29% in 2001 to 20.13% in 2008, being the best rate from these four countries. The worth situation is noticeable in Bulgaria where in 2008 this rate was 61.26% compared to 87.90% from 2001, so very slight improvement was achieved. This relation should be in parity with unemployment rate, however interestingly Bulgaria shows lower rate in 2008 than Romania. These numbers show for Romania a more balanced GDP distribution and despite the political and fiscal instability caused by internal or international waves provides a brighter outlook. One of the weakest areas of competitiveness in Romania is motorway network. It has the lowest rate (1.18) of motorways per 1000 km2.
Country Size in km2 2001 2002 2003 2004 2005 2006 2007 2008 Ratio in 2008 Bulgaria 110910 328 328 328 331 331 394 418 418 3.77 Hungary 93030 448 533 542 569 636 785 858 858 9.22 Poland 312683 398 405 405 552 552 663 663 765 2.45 Romania 238391 113 113 113 228 228 228 281 281 1.18
Figure 5 - Motorway networks [6]

Romania resists and ignores EU and global trends of investing in basic infrastructure of road network. Improvement in road network would seriously contribute to the competitiveness of the country. The reason why Romania could get along so far with such a small road network is that it has the 4th largest railway in Europe in numbers of passengers [7]. Following picture shows the GCI rankings for infrastructure

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Criteria 2nd pillar: Infrastructure 2.01 Quality of overall infrastructure 2.02 Quality of roads 2.03 Quality of railroad infrastructure 2.04 Quality of port infrastructure 2.05 Quality of air transport infrastructure 2.06 Available seat kilometers 2.07 Quality of electricity supply 2.08 Telephone lines

Hungary Bulgaria Poland Romania 57 58 64 46 74 62 70 52 41 102 115 124 54 86 96 79 95 43 103 121 127 56 121 97 51 48 50 110 127 129 61 103 90 63 78 53

Figure 6 - GCI ranking for infrastructure [2]

It is alarming that more than half of the lowest rankings are attributed to Romania, including the lowest score for quality of roads. This is a shaming 129th position out of 133 countries.

Political Outlook
As of July 2010 the Romanian political environment is characterized by a minority coalition government led by Emil Boc, comprising the Democratic Liberal Party (DLP) and the Hungarian Union of Democrats in Romania (HUDR) [4]. The Constitutional Court recently rejected the governments proposal for narrowing budget deficit. This results in a fragile coalition that is very close to fail a vote of no confidence. The contract signed with IMF in March 2009 is the main factor shaping economic policy in 2010-11. The main focus will be on fiscal retrenchment and a reform of the pension system [4]. Recently (May) the government renegotiated the deficit form 5.9% to 6.8%. In addition to raising the deficit level, the government committed to making painful cuts. These cuts are now weakening the power and authority of governing coalition. The National Bank set a year end inflation target of 3.5% (the same as 2008) and 3% for 2011. The prospects for monetary policy are confused following the changes in VAT. This will push year-end inflation substantially above the 3.5% target and result in negative real interest rates at current levels [4].

Recommendations on Improving Competitiveness

I believe the greatest improvement in competitiveness could be achieved by attracting foreign investment in building road networks. Achieving Hungarys level of road infrastructure in 5 years

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

would be a difficult but recoverable effort. It would decrease unemployment, increase local/regional GDP per capita and considerable elevate Romania in GCI rankings. Elevation in GCI ranking would trigger positive view for investors. The second recommendation would be to continuous investment in generating young and university educated workforce with a special emphasis on multi language aspects. Romania being the most eastern country of EU but still with an appreciated level of education could aim to be the near shore solution for several European businesses. The cultural diversity is a card that should be used and developed by Romanians. Furthermore Romania should fight for a special statute for Moldavia allowing easy workforce migration and straightforward investment for Romanian companies in Moldavia. The special relation with Moldavia would allow the Romanian ICT outsourcing companies to keep their service prices low far longer than Poland or Bulgaria could do.

Bibliography and Sources

ID [1] Author/Institute Friedrich von Kirchbach Document Title or Resource A Countrys Competitive Advantage International Trade Centre, International Trade Forum - Issue 1/2003 [2] [3] [4] [5] [6] [7] World Economic Forum Wikipedia Economist Intelligence Unit The World Bank Database Eurostat, European Commission Romanian Railways The Global Competitiveness Report 2009/2008/2007/2006/2005 http://en.wikipedia.org/wiki/Romania Country Report, Romania, July 2010 http://data.worldbank.org/country/romania http://epp.eurostat.ec.europa.eu http://www.cfr.ro/jf/romana/0208/retea.htm

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Annexes
Annex A - The Global Competitiveness Index 20092010 rankings and 2008 2009 comparisons

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Annex B Classifications of economies by stages - 2008/2009

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Annex C Classifications of economies by stages 2009/2010

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Annex D Romania main roads and railway network

Hunor Kovcs EMBA07 CEU Business School

TNBC Competitive Analysis of Romania

Annex E GDP comparative growth

10.00

9.00

8.00

7.00

6.00
Romania GDP growth (annual %)

5.00

Poland GDP growth (annual %) Hungary GDP growth (annual %)

4.00

Bulgaria GDP growth (annual %)

3.00

2.00

1.00

0.00

2000

2001

2002

2003

2004

2005

2006

2007

2008

Annex F GDP per capita and GDP per employed rate

100.00%

90.00%

80.00%

70.00%

60.00%
Romania

50.00%

Poland Hungary

40.00%

Bulgaria

30.00%

20.00%

10.00%

0.00%

2000

2001

2002

2003

2004

2005

2006

2007

2008